HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
When I saw a patient, I would do my best to explain their problem and answer questions. We’ve all had patients who would then just keep asking the same questions over and over. When this happened, I would tell them I had answered their questions as best I could, and anything further would just cause confusion.
The subject of last week’s letter was why I recommend you invest in the precious metals. On that day, the lead article in The Wall Street Journal’s Wealth Advisor section was “The Case For and Against Gold”.
That evening, a subscriber (NS, in PA, who is bullish on gold) sent me a nice note with all of the reasons he has heard that one should not invest in the precious metals. One comment he relayed was “Gold is in a bubble…it will drop in price just like real estate did. Those fools who bought real estate were told the same thing that those buying gold are being told now”.
Last week, I gave multiple fact-based reasons why I thought there was still a long way to go in this precious metals’ bull market. I can’t explain it any better than that; you either agree or you don’t.
However, I will comment further on the assertion that gold is in a bubble. All long-term bull markets start with real values (stocks, 1982, gold, 1999), but end with manias that have no relation to reality. Have the precious metals reached the manic, bubble phase?
No. Bull markets typically have three phases. At the beginning, insiders and sophisticated investors realize there is value and start to buy. In fact, they are often early, actually anticipating the turn (think Peter Lynch and Warren Buffett).
I believe we are now in the second phase of this bull market, where solid investors, who pay close attention to their finances (such as those who subscribe to this newsletter) and other mainstream investors, such as pension funds and bank trust departments (and even central banks. India and China, among others, have been adding to their gold holdings) realize that the precious metals represent a viable investment class. There is also still significant skepticism, as highlighted by the WSJ article and the comments relayed by my subscriber.
In the manic phase, there is no skepticism; everyone believes. In the late 90s, people quite their regular jobs to become day traders. In 2005, there were shows on TV about how to flip houses. When Silver Wheaton (SLW) is the buzz word at cocktail parties or in the doctor’s lounge, when people who have never shown investment acumen are making big bucks, doubling their money in a year, or a month, watch out; you know the end is near. When these same folks are borrowing money on their homes or their credit cards or going on margin in their brokerage account to buy gold, that is the absolute top. And do you know who will be doing the selling? Investors like you and me, who loaded up in the first and second phase of the bull market, when gold and silver represented real value.
We aren’t anywhere near a bubble in the precious metals.
If you would like to read more about manias, I suggest Prof. Robert Shiller’s wonderful books Irrational Exuberance (Princeton U. Press, 2000), and Irrational Exuberance: Second Edition (Princeton U. Press, 2005).
RMD
Last Week in the Market
Since the earthquake, tsunami, and nuclear meltdown, the Japanese Nikkei Index has lost about 13% percent (at one time, intra-day it was down 25%). Is this a buying opportunity, or could the market fall further?
1) The really big money is made if you can buy when things look terrible. My personal style is that I just don’t have the guts (other terms might also apply) for this. I like to buy on strength; not weakness.
2) The feature article in today’s Barron’s is “Buy Japan Now”.
RMD comment: If you were waiting for an entry point into the Japanese market, this would be a reasonable time to pull the trigger. I will just keep buying more gold and silver.
My observations on our market this last ten days have been pretty accurate. In Interim Bulletin #147A (March 10), I noted the market had broken below support at 12,000. The market proceeded to drop as low as 11,550.
In Interim Bulletin #148A (March 16, last Wednesday), I noted the market was ready for a bounce. It was up strongly on Thursday and Friday (although it tailed off at the end of the day).
Because it has been leading the market, I have suggested you watch Freeport-McMoran (FCX, see chart, page 4). Note: A) Early last week, FCX turned up before the market bottomed, and B) the market was up 85 points on Friday, yet FCX closed down. The ETF OIH (Oil Service Holders), which had been up strongly since last fall; also closed down sharply on Friday.
Caution is warranted in the US market.
Do you know the largest holder of US Government debt? In the 1950s, the vast majority of our debt, more than 90%, was held by us, the American people. Debt is not good, but an argument could be made that we just owed each other money (At the time, all of my parent’s savings was in US Savings Bonds. My father wouldn’t even buy a CD at the bank).
Is it the Japanese? Nope; used to be, but not any more.
It must be those darned Chinese, who are trying to buy up the world, right? Nope!!
It is the Federal Reserve!!
But where did they get the money? My father worked hard, and entrusted our life’s savings to the US Government. The Chinese, whether we like it or not, bust their chops, working 60 hours or more a week in what most Americans would consider deplorable conditions. The Chinese make one-tenth of what we make, yet save 40% of what they make. They buy our bonds with capital created by the sweat of their brow.
The Fed just writes a check, sends it to the Treasury, and buys hundreds of billions of T-Bonds and T-Bills. Now you might understand why one US dollar buys only about 25 milligrams of gold, a fleck invisible to this author’s unaided 60-year old eyes.
I receive several emails a day from subscribers. It is my sincere hope that you learn as much from me as I learn from you. This is from a subscriber who has decades of experience buying and managing local rental property.
“Homeowners Associations (HOA) are a relatively new way that municipalities and builders are joining together to limit and define their responsibility. Builder finishes a project, then turn maintenance over to the HOA. City has the advantages of more houses (greater tax base), to which they do not need to provide the usual services (because they are the legal responsibility of the HOA).
Municipalities and builders dreams come true. More income; less work. Oh yes; membership in the HOA is not optional. It is part of the purchase contract.
Enter the other HOA members; John Q. Public meets Joe 6-Pack. The value of your property and your neighborhood are in their hands. Nuf said (I love her whimsical yet sublime, somewhat cryptic, style: Kind of like mine).
Oh yes, the beavers (my comment in the last letter about the destructive beavers in our lake is what prompted this note). Enter Jane 6-Pack, who would rather spend money on more equipment for the park than maintain the pond. Her house is not near the pond, so why should she care? People whose houses back up to the pond are blissfully unaware because someone else is responsible….aren’t they???
RUN, do not walk, away from any property in a HOA (RMD comment: note that condos and co-ops are run by the HOA), unless you want your home and your neighborhood run by John, Joe and Jane. Or the management company they hired (but that’s another story…Actually, just another chapter of the same story).
It’s a good idea to keep the management of your wealth in your own hands. Take advice, but keep control”. (EK, OK).
RMD comment: I figured out a long time ago that if I made it or didn’t make it, it would be because of my own performance and my own decisions, not others. “Keep the management of your wealth in your own hands”. I suggest you remember that.
Our great country was established as a republic, where we choose those of the (presumably) greatest ability and integrity to represent us. A HOA highlights the dis-functionality of complete democracy.
There has recently been debate in Missouri about changing the laws on payday loans, as some consider the current terms and interest rates predatory.
My father worked for 37 years and my uncle for 30 years at General Steel Industries (the Commonwealth) in Granite City, Illinois. They lost their jobs when the plant closed in 1974.
Payday was every other Friday. There was a man who would sometimes take his check straight to the plant commissary, buy a pair of work boots, and put them in his locker. He would then go out and blow the rest (the vast majority) on a weekend of womanizing and booze. When he came back on Monday, he would take the boots back to the commissary for a refund. He and his family would live off that money for two weeks until the next paycheck.
RMD comment: This man used “self-funded” payday loans. As one subscriber wryly noted, “too bad you can’t legislate responsibility”.
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